Comments by Fed Chairman Ben Bernanke helped buoy a nervous stock market and trigger greater demand for higher risk assets. While presenting his semiannual Monetary Policy Report to the U.S. Senate Banking Committee, Bernanke helped ease concerns about the U.S. banking system while restoring investor confidence.
Bernanke set the tone for the day by stating that the nationalization of major banks was not planned. He also added that he believed the government was on the correct path to righting the banking system. These comments fueled a rally in equities and higher risk Forex pairs while putting pressure on safe-haven assets such as the U.S. Dollar, gold and Treasury Bonds.
Euro traders went long in a big way boosted by comments from Fed Chairman Bernanke. During his semiannual testimony before the U.S. Senate Banking Committee, Bernanke stated that nationalization of major U.S. banks was not planned and that the government was on its way to indentifying and fixing the problems in the banking industry. Traders liked his comments and felt optimistic enough to buy higher risk assets such as the Euro as they felt the need to lighten up their positions in the safe-haven U.S. Dollar.
The rally still has the appearance of short-covering as it was primarily based on emotion. The reality is that the Euro still faces exposure to the deteriorating Euro Zone economy and the possible downgrade of Eastern and Central European banks. Gains could be limited for these reasons and the strong possibility of a 50 basis point rate cut at the next European Central Bank meeting on March 5.
The British Pound lost some ground to the U.S. Dollar on Tuesday. Traders took a break from the recent rally. Optimistic comments from Bernanke failed to boost the British Pound but this should not be a major concern as Pound traders themselves are confident in the recent moves by the Bank of England and the U.K. government.
The BoE is expected to try to revive the economy with another rate cut at its next meeting on March 5. This will probably be the last following a series of rate cuts. In addition to cutting interest rates, the U.K. government has allowed the Bank of England room to buy assets including commercial paper. The combination of interest rate cuts and stimulus plans is bringing support to the Pound, but investors will be growing impatient soon if these moves do not translate into real improvements in the economy.
The Japanese Yen continued to lose its luster as a safe haven currency as the U.S. Dollar marched higher on Tuesday after another spectacular buying spree. The Yen is getting punished on perceptions that the Japanese economy is on the brink of a major meltdown.
The recent wave of selling pressure in the Yen was set off by a report last week which showed that the Japanese gross domestic product is on an annual pace to decline as much as 12 percent. The decline in demand from Euro Zone, Australian, and U.S. customers for Japanese exports will continue to hurt the economy as long as these regions remain in recessions. The long-term outlook is bad for the Yen, but nonetheless, traders have to be aware of vicious short-covering rallies. News that the Bank of Japan is interested in buying assets may actually trigger one of these short-covering rallies.
The U.S. Dollar fell versus the Swiss Franc on profit-taking after a strong rally by the USD CHF. Traders have been hesitant to buy the USD CHF since last Friday following the announcement of a plan by between U.S. officials and UBS to reveal the name of tax cheats. This news did not sit well with the Swiss ruling party which has called for a boycott of U.S. goods and the possible repatriation of Swiss National Bank gold held in U.S. banks.
The UBS issue may or may not be the problem with the USD CHF at this time, however, it is interesting to note that the Dollar quit rallying on this news. The best thing to do is to monitor the situation.
The longer-term fundamentals support a weaker Swiss Franc because of the threat of quantitative easing and devaluation. Overbought conditions could be slowing down gains, so the best strategy is to let the USD CHF come down to a value area for the next buy.
The Canadian Dollar posted a strong gain on Tuesday as the rally in the equity markets triggered by friendly Bernanke comments regarding the U.S. banking industry helped increase trader appetite for risk. As equity markets rose, buyers became attracted to commodity-linked currencies like the Canadian Dollar, Australian Dollar and New Zealand Dollar. Although this was most likely only a short-covering rally, it goes to show you how fast these commodity-linked markets can turn if traders become more optimistic about a global economic recovery.
The boost in crude oil on the news that more OPEC members were complying with production cuts helped to support higher prices on Tuesday. The up move in crude helped push down the USD CAD. This move was most likely short-covering, however as the Canadian economy is still under pressure because of falling exports and declining retail sales.
The Australian Dollar rose on Tuesday as trader appetite for risk increased following optimistic comments from U.S. Fed Chairman Bernanke regarding the condition of U.S. banks. In his commentary, Bernanke said that nationalization of major banks was not planned and that he believes the government was on the correct path to identify and fix the negative issues in the banking system. This news triggered an emotion-driven short-covering rally in equity markets which spilled over to commodity markets. Feeling a little less pessimistic, traders bought the AUD USD. Whether this rally is sustainable is still the question, but the chart formation shows that support is holding.
Fed Chairman Bernanke's optimistic comments about the U.S. banking system helped increase appetite for higher yielding currencies like the New Zealand Dollar. Although the move was primarily short-covering, it did give the NZD USD an emotional boost after several days of decline.
Based on falling demand for exports and higher-risk assets, the News Zealand economy is likely to remain under pressure. Having to rely on other countries to help pull it out of a recession, the New Zealand economy is likely to continue to contract unless the global economy begins to recover. All the Reserve Bank of New Zealand can do at this time is lower interest rates, provide stimulus plans and wait for a global economic recovery.
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